Depression in late-life is a major contributor to disability, morbidity, and mortality and, as such, is a major public health concern for the elderly. One of the strongest risk factors for onset or persistence of depressive symptoms in late-life is functional impairment. Though antidepressants are effective in reducing depression in late-life, comorbid impairment contributes to poor treatment response and greater likelihood of residual depressive symptoms. Adjunctive psychotherapies or stand alone therapies that address impairment related issues are needed. This study will test the effectiveness in reducing depressive symptoms of a 10-week psychotherapy that helps people aged 55 and older with chronic illness cope emotionally with functional impairment. This intervention is highly innovative because it has specific therapeutic techniques to help elders cope with impairment. To address access issues in severely impaired elders, the intervention is conducted using a combination of in-home and phone sessions. The patient is not required to travel. It is also innovative because it will be combined with an illness management program that helps the patient manage medical aspects of their illness such as medication compliance, diet, and symptom monitoring. Combining the therapy with an illness management program increases the likelihood of future dissemination of the intervention, as illness management programs are widely supported in chronic illness care. SPECIFIC AIMS: 1) To demonstrate greater effectiveness in reducing depression for older adults with CHF or COPD who are participating in a combined psychotherapy and illness management program (COMBO) when compared to elders participating in an illness management only program (IMO). The main outcome analysis will compare the two treatment arms on 1) decline on the total score for the Beck Depression Inventory-II (BDI-II)(1) 2) the proportion of patients showing a 50% or greater decline on the total BDI-II Score, and 3) the total number of patients remitting from either major or minor depression with remission defined according to Frank et al. (2). 2) To demonstrate greater improvement for COMBO participants' physical and social functioning as well as illness management self-care behavior than for IMO participants as indicated by group differences on the SF-36 (3) Health Survey and the Medical Outcomes Study Measure of Patient Adherence. Group comparisons will be made using the total SF-36 score and also specific SF-36 subscales including Physical Functioning, Role Limitations due to Physical Health Problems, Role Limitations due to Emotional Problems, and Social Functioning. 3) To test for the maintenance of group differences in depression and functional outcomes between the COMBO and IMO treatment conditions at 26 and 52-week post-randomization. Group comparisons will be made using the BDI-II and functional outcomes referenced above.